QDROphile

I think that the arrangement would not be exempt from ERISA if the employeer would make salary reduction contributions only to TIAA-CREF, no matter how many fund options are provided within TIAA-CREF. The employer is not required to seek any providers at all. But if the employer imposes too much of a limit, then ERISA applies. We start getting comfortable with the ERISA exemption somewhere around five or more employer-identified diverse providers unless something else funny is going on. If you offer TIAA-CREF but do not restrict, and no one else comes to the party, then you are OK under the exemption. I don't understand the effort to have an exempt arrangement when the employer has a non-exempt one.

The discussion was not off track. It simply did not discuss that aspect of the problems, and the multiplicity of the problems was the reason for the mention in my first post. Your point is well taken. Some ESOPs are intended to be a closed system. All available shares are allocated each year within the ESOP and the Company does not intend to issue additional shares for extraordinary contributions. Unless you can live with tortured plan terms, you can't squeeze any make up shares out of the leveraged suspense account because that would reduce the expected allocation to others for the year. Maybe you can't partially prepay the loan to cause more shares to be released because of the loan terms. If you can prepay, the earlier discussion addresses how you measure -- by shares allocated or by make up contribution. But then you must have adequate allocation terms to give the extra shares to the returning participant. The problem with providing in the plan for a suspense account to capture shares for future allocation is that it offends most general principles governing allocations. Military service can extend for more than a year, which is outside normal suspense tolerance. How will you allocate if the particpant does not return? For the year of release from the leveraged suspense account or the year the make up rights expire? For which year do you count the allocation for testing and limitation purposes? We need official guidance and until we have it the solutions are uncomfortable.

You said that the returning participant would get the same number of shares as the participant would have received had the participnat not gone to military service. So the make up is the number of shares equal to the number that would have been allocated (equal shares). Another alternative is the make-up of the value of the contribution that the participant missed (equal value). Pardon my shortcut terminology. Why do you think an equal number of shares is the correct altnernative?

Leveraged ESOP allocations are made according to units (shares) in some proportion to loan repayment. The number of units is established relative to the loan at the time the shares are allocated, so the allocations are essentially made with respect to basis (the cost of the shares) and not the value of the shares at the time of allocation. A certain loan payment will release a certain number of shares for allocation. Generally, the same loan amount payment will release the same amount of shares (and the same basis) each time. In the case of the principal only method, the same amount of principal payment releases the same amount of shares (and the same basis). The point is that what gets released with a loan payment of a certain dollar amount is NOT the value of the share. So the question under USERRA is whether the employer contribution in DOLLARs must be the same as if the participant were employed in some prior year or the number of SHARES allocated to the participant must be the same as if the participant. Making up the same number of shares could be more or less expensive in a later year. You say the the measure is shares. In all other types of DC plans, the measure is contribution dollars and consequences of investment earnings or loss is not taken into account. If the measure is shares, investment earnings are effectively taken into account. I am assuming that the shares cannot be obtained from the ESOP suspense account because the allocation terms do not allow suspense shares to be allocated for a prior year. I have seen no authority one way or another. Please share the reason for your conclusion that the measure for ESOPs is equal shares instead of equal contribution.

Thank you for pointing out the error in my post. It should have said that a zero election WOULD make the employee ineligible thereafter. I don't know how both my fingers and proof reading slipped so badly. At least I had the last sentence to contradict the wrong one.

BKH: Your solution does not quite work for an order that provides that the the AP will rec eive a specified sum that is not adjused for earnings. If you identify any valuation date, the investments can still lose money unless you invest in a money market thereafter, and you should see another recent QDRO thread for a discussion about issues that arise then because of the positive earnings. The order would have to say something like the following: The alternate payee shall receive the lower of the following: (1) $_____________. (2) 100% of the balance of the participant's account at the time the account is charged with the payment to the alternate payee. Even this approach has to be adjusted in the event the participant has a plan loan, and it assumes that the funds are liquidated for payment to the alternate payee as of the date the participant's account is charged and not reinvested for later payment to the alternate payee. I take it quite literally when an order names an amount and says not to adjust for earnings. That means no more and no less than the specified amount. But orders often imply adjustment for earnings, even when they specify amounts. You have to be careful about interpretation of the order.

Subject to plan terms, which should not be to the contrary, contributions are not made for a year if the person has not returned. For any number of reasons the person might not return and no contribution would be required (and for a highly compensated person might not be permitted). The contribution for a prior year is made after the person returns, but is attributed for all compliance purposes to the prior year. Earnings need not be imputed. 401(k) plans provide some wrinkles because the deferral amount must actually be delivered within the permissible period, and the make up match depends on the make up deferral. We don't have guidance on where the make up deferral amounts can come from. I think certain leveraged ESOPs present problems because allocations are made according to basis and it may be impossible to put the returning employee in the same position with a subsequent allocation unless plan terms get tortured or more cost is incurred to provide the benefit later than if allocation had been done with the employee there for the year.

If your experience is that no matter how much you pay, the plan says the same thing, you don't have much experience. One size does not fit all and quality varies. Price is not necessarily the touchstone. I think your statment, coupled with your promotion of AFLAC is rather telling. My experience is that AFLAC agents are agressive pains in the neck for employers, concerned with marketing products, often through the back door, rather than getting arrangements done correctly. In defense of AFLAC, I will say that when we finally call the national office and get someone that knows how to do something besides sell, we finally get answers and accomodatons (contrary to the misinformation of the agents) that are reasonable.

The distribution must be paid to an alternate payee only. As a matter of state law, the court could order the alternate payee how to apply the money, and that provision could be in the domestic relations order that is also a QDRO. But the order to the altnernate payee would only be enforced by the court and the plan administrator would disregard the instructions to the altnernate payee as long as the instuctions to the plan said to pay the alternate payee. Such an order might have unintended income tax consequences, but that is not the plan's problem, either.

What is the big hurry?

Our approved volume submitter plans provide that the surviving spouse may consent after the participant's death to the participant's designation of another beneficiary.

I don't think that is the correct interpretation. The regulation says that a one-time election is not available if the person has previously been eligible under another plan of the employer. Nothing about the election affects participation in any other plan, subject to plan terms. However, a zero election would not make the employee ineligible under the plan for purposes of allowing a later one time election under another plan of the employer. One opportunity is all you get.

Not until the divorce. Search Benefitslink for the brand new revenue ruling on this point.

mbozek: I think you are both not reading what I posted and reading too much into what I posted at the same time. I expressly limited my comments to a situation in which the order does not say anything about a date that is identified with the creation of an alternate payee's interest. It the order has a provision for time, then time value is presumed and that implies some sort of investment measure. Interpretaton of the terms of the order is still required to decide how to deal with the time value. Nothing about what I posted suggests that a plan administrator would not observe proper formalities such as sending a rollover notice and collecting a social security number and the rollover election of the alternate payee as part of the distribution process.

See PLR 8440085

When the terms of the order say "pay $15,000" I don't see how that means "segregate $15,000 and invest it and pay the net amount." "Pay $15,000" does not seem to be so difficult that we can be sure that another result is "pusuant to" the terms of the domestic relations order, as required by IRC section 401(a)(13)(B). I did not claim that anyone would take adverse action based on the literal reading, but it is an issue and I think it is silly for a system to be unable to pay a specified amount as instructed by the order. Conceptually, that is the simplest course of action. We are not discussing a situation where the order assigns any time value to the distribution by specifying a date or otherwise, or gives the alternate payee any choice over timing of payment. An order that specifies an amount to be paid to an alternate paye and then gives the alternate payee a choice about when to take it should not be qualified. Among other things, if the account loses value, the plan may have insuffcient assets to pay the specified amount. Persons who draft domestic relations orders can easily provide for creation of an amount for an alternate payee that is segregated and invested and distributed at a particular time, including a time specified by an alternate payee. When they draft it differently, it must be presumed that they meant what the words say and it is not for the plan administrator to decide if it makes sense. Either follow the terms of the order or disqualify it because it asks the plan to do something that the plan cannnot. With respect to the comment that the earnings do not belong to the participant, that may be exactly what the order was meant to deal with (however unintelligently). The order may intend that any delay in the actual distribution be completely at the risk of the participant. If the money is hanging around and invested, the participant can claim that every penny of gain or loss belongs to the participant when the order says "pay $15,000 to the Alternate Payee." Faced with a Fidelity or a Microsoft, we all have to be practical and the world will not end. There are ways to protect the plan under these circumstances without disqualifying orders right and left. But we can recognize a 900 pound gorilla for what it is.

Someone has to decide if the original termination was a bona fide termination. The IRS has issued some guidance that might call that into question. Without a bona fide termination, you don't get to re-entry questions.

Think about it this way. Aren't you describing an annuity for the life of another? Does the plan offer that form of distribution? Not any plan I have seen. But you can get to a similar result if the participant starts a joint and 50% survivior annuity with the alternate payee (presumably former spouse) as the contingent annuitant. If the QDRO provides, and the plan allows, the annuity payments during the participant's life can be split in two between the participant and AP. If the participant dies, the AP continues to get the same amount, not from the divided payment, but as the survivor. If the AP dies first, the full payment is thereafter restored to the particpant. When the partipant dies, all payments stop. Or vice versa.

According to Fidelity, its system requires that they set up an account for the alternate payee before they can make a distribution. Evidently, this is so they can get things in line for Form 1099, etc. The account has to be invested in some way for some period of time. That time can be longer or shorter, depending. I have tried asking if the account could be set up with a money market investment, then be charged with the $15,000 distribution, and then return the earnings to the participant's account, but they declined. I worked very hard to get a different answer, but failed. This is not the only compliance probelm with the Fidelity system. If a plan is not using full outsourcing to Fidelity, there are opportunities to get around the system. One client tells me that T. Rowe Price will go through the process all in one day to get the desired result, if you are very careful with timing and instructions. But they had at least one instance where it did not all come together and ended up with earnings. There is a practical solution, and I don't think anyone would get too ruffled about it, but from a rigid literal and technical perspective, it is a problem.

Please explain the formality that makes a bonus arrangement into an ERISA plan.

I agree with the response from mbozek, but I will focus in a different way. The terms of the order determine what the alternate payee gets. If the order says that the alternate payee gets something as of a particular date, the presumption for interpretation of the order is that some time value of the "something" must be computed form that date until distribution or actual creation of an account for the alternate payee (upon creation of the account, the time value take care of itself accrding to the investment of the account) . Generally, that computation is bsed on the investment returns of the account (probably prorated to account for multiple investment funds) that will be charged to actually create the amount for the alternate payee. But the order may have other instructions, such as a prescribed interest rate to apply from the "as of" date. The terms of the order control, and it is OK to disqualify if the terms are ambiguous or nonsense or perhaps even just missing. Good written QDRO Procedures are helpful in setting standard interpretations if the order lacks certain terms. If the order simply specifies "pay alternant payee $15,000" and is silent about any earnings adjustments, then the plan pays the alternate payee $15,000 as soon as practicable (or when the order says) no matter when the order was written, entered or delivered. By the way, outfits like Fidelity can't follow an order like that if they are providing fully outsourced services to a plan. Violation of the rules does not seem to bother them. If the order says "pay the alternate payee $15,000 on December 31, 2002" and the plan gets the order, or would determine that the order is qualified, on January 20, 2003, the order is not qualified. You don't try to fix it by imputing interest or a share of earnings.

Everyone gets 3% no matter how much service unless the plan to excludes persons who have not met permissible age and service requirements and the person never go into the plan. Once the person gets in, the person gets 3% per year without condition.

The Tax Court has ruled, and the Circuit Court has upheld the ruling, that a participant who directs investment of the participant's account is a fiduciary under IRC section 4975(e)(3). Flahertys Arden Bowl, Inc. v Commissioner. Both courts expressly acknowledged the difference from ERISA.

I think it is prohibited, at least from a tax perspective. Because the participant in the XYZ plan can direct investments, the participant is a fiduciary for tax purposes (not ERISA purposes). The investment in the LLC benefits the participant as an LLC member (I presume that additional capital is a good thing for an LLC and therefore benefits the LLC members) . The investment of plan assets by the fiduciary in a manner that benefits the fiduciary's personal interest (as an LLC member) is prohibited. Conclusions could change if the facts and presumptions change.

The participants in the nonunion plan are parties in interest, therefore they must be able to take a loan. The practice of not allowing loans to persons who are not active participants is based on the person no longer being an employee and thus no longer a party in interest. That practice, when employed unconsciously (which is 99+% of the time) is dangerous because you can run into an inactive participant who is still a party in interest.